Sophisticated capital budgeting systems and their association with corporate performance

Abstract

Prior empirical studies have been unable to establish any clear relationship existing between the capital budgeting practices adoted and corporate performance. This may partly be explained by the restrictive definition of capital budgeting employed in these studies. The present study, based on data gathered from 144 major companies, examines the relationship between the degree of sophistication identified in capital budgeting systems and corporate performance levels achieved over a number of years, when controlling for the interactive corporate characteristics of size, risk, capital intensity and industry class. The results are surprising. They reveal a consistent, significant negative association between the level of capital budgeting sophistication and corporate performance.